Citigroup Shares Jump After Fed Approves Plan To Return $18.9 Billion To Shareholders
Citigroup (NYSE:C) saw its shares jump the most among the largest U.S. banks over trading on Thursday, June 29, after the Fed cleared the capital plans of all financial institutions participating in the latest round of its annual stress test for banks (see Fed Clears Capital Plans Of All U.S. Banks Subject To Stress Tests For The First Time In Seven Years). As Citigroup is the only U.S.-based bank holding company to have its capital plan rejected by the Fed on two occasions in the past (2012 and 2014), investors had tempered their expectations for the bank’s capital return plan for 2017. But the bank clearly did better than what investors expected by announcing its intention to return up to $18.9 billion to shareholders over the next four quarters – almost 80% higher than the $10.4 billion from its previous capital plan.
The proposed plan entails a 100% increase in quarterly dividends from 16 cents a share to 32 cents a share, and total share repurchases of up to $15.6 billion. We are currently in the process of updating our price estimate for Citigroup’s stock to factor in the better-than-expected capital return plan.
See Our Full Analysis for Citigroup’s Stock Here
Citigroup was known for handing out handsome dividends in the pre-2008 era, with total dividends of more than $9 billion each year between 2005 and 2007. Dividends were slashed in 2008 and were completely stopped until Q1 2011, after which they were increased to the token figure of one cent per share each quarter. They remained at that level for fifteen quarters, and were finally boosted to 5 cents in Q2 2015. Dividends increased more than three-fold to 16 cents per quarter beginning in Q3 2016, and are now expected to double to 32 cents per quarter from Q3 2017.
The table below summarizes Citigroup’s capital return figures for each year since 2005 and has been compiled using figures reported in annual reports:
Notably, Citigroup initiated a share repurchase program in 2013 for the first time since the economic downturn. An important reason for the move was the substantial discount at which its shares were trading to its book value. As the bank’s shares continue to trade well below its price-to-book ratio, the decision to return more cash to investors through a share repurchase in 2017-2018 makes sense.
As Citigroup paid $0.16 in dividends per share over the first two quarter of 2017, and is expected to pay $0.32 per share over the remaining two quarters, total dividends for 2017 should be $0.96 per share. This works out to a dividend payout of around $2.6 billion for the year, assuming the total number of shares outstanding remains constant at the current level of 2.75 billion. Also, the bank had authorization in place to repurchase up to $3.6 billion worth of shares at the end of 2016, which we expect the bank to exhaust over the first half of the year (Citigroup received permission to buy back an additional $1.75 billion worth of shares last November besides the $8.6 billion repurchase approval under the 2016 stress test cycle). Taken together with $5.2 billion in proposed repurchases for the rest of the year (half of the total proposed repurchases of $10.4 billion), this points to total share repurchases of $8.8 billion in 2017.
We represent dividend payouts and share repurchases in our analysis of Citigroup in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how a change in Citigroup’s adjusted payout ratio affects its share value by making changes here.
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